Market Efficiency Case Study-3

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Assessment Type

Case Study

Word Count

2000 words




3 Days

Assignment Criteria


Prepare a report to potential investors advising whether they should invest in Legg Mason Value Trust  (LMVTX). The objective is largely to explore the performance of LMVTX in light of the concept of  market efficiency and the skills vs. luck of its fund manager, Bill Miller. In preparing your advisory  report, you should aim to meet the objective above by addressing the following:  

  1. How do you quantify LMVTX's abnormal performance?  
  • Compute Jensen's alpha for the past and current performance of LMVTX (during success,  failure – including the Global Financial Crisis (GFC), and whole periods). You need to collect  historical prices for this purpose. 
  • Explore the market efficiency concepts to evaluate whether positive alpha is possible. [Hint:  Grossman & Stiglitz paradox, limits to arbitrage, behavioural economics concepts in Lecture  4 and recommended readings] 
  1. What does alpha tell us about Bill Miller’s skill or luck? What does the literature say about the  main contributing factors (luck vs skill, in varying proportion) to alphas? Discuss what this mix is  for Bill Miller. Explain how the estimated alpha (s) and the debate on the mix of Bill Miller's skill  and luck fit in with the notion of market efficiency. 
  • In doing so, you can analyse the investment strategy of Bill Miller (both success and failure).  You may want to note any differences from or similarities with the investment approach taken  by other so-called 'super investors' such as Warren Buffet.  
  • You may want to infer the factors that might have led to his failure from his letters to  shareholders. 

See his comments in his Letters to Shareholders on Value Trust's poor performance shareholders-53747992.html 

  • You may have noticed that the estimates of alpha are sensitive to the time period you include  in the regression. Is it possible that alpha (skill) varies over time? Relate this point to Bill  Miller’s quotes about his performance during his good years and bad years (pre and post 2007  interviews). 
  1. Your conclusion should include your investment advice for potential investors whether to invest  in LMVTX relative to passive funds in light of the efficient market hypothesis and your debate on  Bill Miller's skill vs luck.

Part II  

Corporate Social Responsibility (CSR) is associated with the conduct of corporations and in  particular, whether corporations owe a duty to stakeholders other than shareholders. Some leaders  have started to look at CSR as central to their overall strategies, a creative opportunity to  fundamentally strengthen their businesses while contributing to society at the same time. 

In a letter to investors (, Mr Peter Nachtwey (CFO) stated that 'At  Legg Mason, Corporate Social Responsibility is more than our environmental, social, and governance  (ESG) investment capabilities — it's about how we conduct our business.' 

Explain what did Mr Nachtwey mean by the above statement?

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Assignment Solution



Jenson’s Alpha Ratio measures the excess return of the Security compared to the expected return calculated as per the Capital Asset Pricing Model. Alpha explains the varying contribution of luck and skill of the fund manager. In the give report, abnormal returns of Legg Mason Value Trust is calculated and analysed based on which the mix of skill and luck of Bill Miller, fund manager of LMVTX is discussed.

Quantifying LMVTX’s abnormal performance

Jenson’s Ratio measures the excess return of the Security compared to the expected return calculated as per the Capital Asset Pricing Model. Investors usually look for the assets having positive Alpha as positive Alpha is the signal of abnormal positive return. Asset having positive Alpha gives returns higher than the risk-adjusted returns that are estimated using the CAPM model. An asset may show negative Alpha, implying that the returns are not compensating enough over the average of market returns on the given beta of the asset (Ace Managers, 2016).

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